Central bankers are tightening the U.S. economy as inflation takes hold in historic fashion. Meanwhile, the unexpected shock of war in Ukraine is slowing global growth. Experts say the moment recalls the "Great Inflation" of the 1970s and 80s. This period is remembered for stagflation, which describes the dual-threat of stagnant growth and persistent inflation. Today's Federal Reserve leaders hope to avoid such a dramatic turn of events. But their plan could backfire, as many root causes of inflation are outside of the bank's control.
The Federal Reserve is hiking interest rates in an effort to defuse an explosive year of price inflation. But global forces could neutralize the effects of that tightening of monetary policy, and keep inflation high.
Some observers believe the U.S. government may have misread the looming threat of inflation. During the pandemic, Uncle Sam dispersed historic sums of cash to blunt widespread economic damage. Analysts say this stimulus produced strong household savings. A boom in demand for durable goods followed.
This surge in demand came as global supply chains stalled out, and a persistent bout of inflation followed. In March 2022, prices across all categories rose to historic levels, 8.5% year over year. And investors believe the price hikes aren’t over yet, according to a New York Federal Reserve survey.
“The only way to break the back of inflation that’s running out of control is for very tight monetary policy, ” says Richard Fisher, former President of the Federal Reserve Bank of Dallas. “It slows things down because everything becomes expensive.”
Today’s inflation isn’t spiraling in the way it did in the recent past, however. From 1965 to 1982, inflation soared, at times reaching double-digit rates. In 1979, the central bank, under Chair Paul Volcker, kicked off a tightening cycle that resulted in interest rates of nearly 20%.
Strong monetary policies killed inflation, but also led companies to offshore labor costs. As a result, American workers saw their labor income stagnate relative to productivity for four decades.
This period in U.S. economic history is remembered for stagflation, which describes the duel threat of stagnant growth and persistent inflation.
Today’s Federal Reserve leaders hope to avoid such a dramatic turn of events. But their plan could backfire, as many of the root causes of inflation are outside of the bank’s control.
» Subscribe to CNBC: cnb.cx/SubscribeCNBC
» Subscribe to CNBC TV: cnb.cx/SubscribeCNBCtelevision
About CNBC: From 'Wall Street' to 'Main Street' to award winning original documentaries and Reality TV series, CNBC has you covered. Experience special sneak peeks of your favorite shows, exclusive video and more.
Connect with CNBC News Online
Get the latest news: www.cnbc.com/
Follow CNBC on LinkedIn: cnb.cx/LinkedInCNBC
Follow CNBC News on Facebook: cnb.cx/LikeCNBC
Follow CNBC News on Twitter: cnb.cx/FollowCNBC
Follow CNBC News on Instagram: cnb.cx/InstagramCNBC
#CNBC
Will Stagflation Return To The U.S.?